R U Ready 4 Dec/Jan Effect?

B

BlueHorseshoe

I'd like this thread to consolidate a discussion on:

1. What is/are the Dec/Jan effects? (Are they distinct or one in the same?)
2. Why do these effects arise?
3. What is the outlook for these 'effects' in the coming 60 days?
4. What are some attractive ways of positioning to take advantage of this phenomenon.

I guess as a thread originator I should begin with a contribution ... but that is the whole reason I've begun this thread. Namely, I vaguely understand the January effect, but never attempted to profit directly from it and don't have resources at hand. I realize there are hardcopy resources out there but I live overseas and concerned I wouldn't take delivery in time to digest and act on the material.

I've considered going long the RUT or another small cap index, and spread it against the mini-DOW. Also considered going long a list of high-Beta small cap names and and possibly hedge w/ a short of the Dow.

What do you think?
 
I don't expect to see a January effect this year.....we've had a "January effect" since March...a market led by small and medium caps. I expect to see the opposite.

OldTrader
 
2002 saw a Jan sell off, after a rally to the end of 2001, this time bang bang...a sell off wil be jan to feb 2004...
 
I recently read somewhere that bull markets for small caps typically last several(?) years and thus this one has only begun, for small caps that is.

And there are so many naysayers (like yourself) still looking in the rearview mirror, it only reinforces my bet.

Quote from OldTrader:

I don't expect to see a January effect this year.....we've had a "January effect" since March...a market led by small and medium caps. I expect to see the opposite.

OldTrader
More...
 
Quote from BlueHorseshoe:

I'd like this thread to consolidate a discussion on:

1. What is/are the Dec/Jan effects? (Are they distinct or one in the same?)
2. Why do these effects arise?
3. What is the outlook for these 'effects' in the coming 60 days?
4. What are some attractive ways of positioning to take advantage of this phenomenon.

I guess as a thread originator I should begin with a contribution ... but that is the whole reason I've begun this thread. Namely, I vaguely understand the January effect, but never attempted to profit directly from it and don't have resources at hand. I realize there are hardcopy resources out there but I live overseas and concerned I wouldn't take delivery in time to digest and act on the material.

I've considered going long the RUT or another small cap index, and spread it against the mini-DOW. Also considered going long a list of high-Beta small cap names and and possibly hedge w/ a short of the Dow.

What do you think?
More...

the january effect is the reflex bounce from stocks that were excessively sold off the december before for tax losses. in theory there shouldn't be much of a january effect this year because most stocks are winners this year so wont need to be sold for tax losses in december.
 
Quote from BlueHorseshoe:

I recently read somewhere that bull markets for small caps typically last several(?) years and thus this one has only begun, for small caps that is.

And there are so many naysayers (like yourself) still looking in the rearview mirror, it only reinforces my bet.
More...

That's what makes a market my friend. Someone buys, someone sells. Please feel free to fade me.

But before you do, understand I did not say that small stocks were going down. Your question had to do with the January effect.....something that you evidently know little to nothiing about.

As explained to you elsewhere in this thread, the January effect arises because of tax selling. This year because of the strong performance of small stocks, I would not expect to see tax selling prior to the end of the year. Why would anyone sell their small stock that they have a large gain in, just to pay taxes this year? Rather, I would expect this selling, if it is to take place, to occur in January.

There may be some candidates for tax selling this year....drug stocks for instance.

So again, the January effect has its roots in tax selling by those looking to sell their losers to establish their loss for this years taxes....which later causes a rally in January after the tax selling has let up.

Speaking of rearview mirror....wouldn't you say that the January effect is a classic rearview mirror strategy?

OldTrader
 
You've only scratched the surface vhen.

This from the Amazon intro to "Beyond a Random Walk":

"We learn, for example, that shares of stocks that have appreciated in recent months become scarce in late December, because investors wait until January before they sell (to postpone payment of taxes on profits). This scarcity drives the price up--the "December Effect"--and smart buyers can make the equivalent of 75% annual return on a five-day investment. "

Seems as though if the markets declined during the year then we should see tax selling in December and a January bounce. If, on the other hand, we rallied throughout the year, the rally would come in December and the weakness in January ...

Another contributor to January effect is mutual fund flows in that the earliest one can make 2004 IRA/401K contributions is January.

Also year end bonuses are typically invested in this time period.


Quote from vhehn:



the january effect is the reflex bounce from stocks that were excessively sold off the december before for tax losses. in theory there shouldn't be much of a january effect this year because most stocks are winners this year so wont need to be sold for tax losses in december.
More...
 
No offense intended old-dude. It's only personal if you make it so.

But back to the subject, I am not exclusively exploring a January effect as you and others seem to assume, but perhaps a December effect / 'Santa Clause' rally that then ... what, fades in January?

At this time I also do not see a major correction ahead of elections only 11 months away. That I continue to hear so much negativity in the face of plainly improving economic metrics is striking.


Quote from OldTrader:



So again, the January effect has its roots in tax selling by those looking to sell their losers to establish their loss for this years taxes....which later causes a rally in January after the tax selling has let up.

Speaking of rearview mirror....wouldn't you say that the January effect is a classic rearview mirror strategy?

OldTrader
More...
 
I studied the January Effect when I was a graduate MBA student under professor Donald Keim who was involved in the leading research of this anomaly when it was first discussed. I was so intrigued by this that I wrote my masters thesis in portfolio management and built my quantitative momentum model which I continue to deploy today:

http://finance.wharton.upenn.edu/~keim/
 
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